Public Financial Management Reform in Ethiopia (1996 2007) Lessons from the HKS DSA Project Stephen Peterson Presentation to the M RCBG March 11, 2008
Policy Issue Financial Reform in a Rapidly Decentralizing Poor Country 2 questions How to decentralize with limited capacity at center and locale How to Get the Basics Right in a poor decentralizing country 1
Snapshot of the DSA Project 12 month design (8 in country) $34.5 million over 11 years 5 phases $2.8 + $1.5 $3.8 $7 $14.7 4.7 Funded by USAID throughout Irish Aid in phases 3, 4, 5 Netherlands Aid in Phase 4 and extension Staffing Total: 63 5 expatriates 32 Ethiopian professional staff 26 Support staff 2
Environment of the Reform Extremely poor country (99 of 103 of UN development index for developing countries) Recovering from years of internal conflict 3 serious droughts (a 50 year 2002/2003 13 million at risk) 2 wars (Eritrea 98 00); (Somalia 2006?) Weak political legitimacy (2 elections, one near coup) Large and geographically isolated Little infrastructure and limited human resource capacity Ambitious policy of administrative decentralization Ambitious and inchoate agenda by foreign aid agencies 3
Poverty Indicators Indicator Eth Sub Africa LDCs GNP per capita (USD) 100 480 420 Life expectancy at birth (years) 43 47 59 Infant mortality (per 1000 live births) 107 92 77 Child malnutrition (% of children under 5) 47 32 43 AIDS prevalence rate (% of adults) 10.8 8.6 Access to improved water source (% of pop) 30 43 64 Illiteracy (% of population age 15+) 62 38 38 Gross school enrollment rate (% of school age population) 57 78 96 4
The DSA Strategy of PFM Reform: Platforms of PFM (Penrose and Peterson, 2001) Sequence of Implementing Financial Reform Control (Inputs) Transaction Platform Budgets, Accounts, Commitments, Disbursement (Treasury), Financial Information Systems Manage (Outputs) Policy/Planning Platform Macro Economic Fiscal Framework Budget Policy and Strategy Medium Term Frameworks Intergovernmental Transfers Performance/Program Budgeting Plan (Outcomes) Legislative Platform Financial law/regulations Policy Appropriation Expenditure Evaluation 5
Pathway of Ethiopia s PFM Reform Multi year budget planning Performance budgeting Financial Statements Trained to date: 70,500 IT: (Custom, Int l Standards, S/A, LAN, WAN) Accts Reform Somali Post Implementation Support small regions IT: (IBEX Upgrade, Rules based, Oracle, Flexible Reporting ) To be trained: 2,340 Cost Center Budget Double Entry Bookkeeping Modified Cash Accounting Trained to date: 47,000 IT: (Custom, Relational databases; S/A, LAN) Line Item Budget Single Entry Bookkeeping Cash Accounting IT (Spreadsheets, S/A) FY 96 FY 98-03 FY 07 FY08 6
How to Introduce the Basics of PFM Sustainability at Each Stage Stage 1: Comprehension of the existing system documentation, massive training, legal framework Stage 2: Improvement of the existing system forms, FMIS Stage 3: Redesign to a new system chart of accounts, budget classification, cost center budgeting, double entry bookkeeping, modified cash accounting, MEFF, performance framework, unit cost/needs based transfers, redesigned FMIS Stage 4: Consolidation of the new system freeze functional change, post implementation support, upgrade the IBEX technical platform 7
Critical Success Factors Context Hard budget constraint Effective not efficient financial control Ownership Government designed Civil Service Reform Government participation throughout (Minister 13 years) Continuity of technical assistance` Purpose Policy (not crisis) driven: decentralization; rebuild civil service Strategy Evolve existing system: from effective to efficient financial control 8
Lessons Learned 9
Lessons in Sequencing Between PFM Platforms Transaction platform then policy/performance platform (note there was an initial reform of the financial law/regs) Within the Transaction Platform Financial Procedures: Budget Classification, Chart of Accounts, Financial Calendar Existing Systems: Accounts current before implementing new systems Implementation: Budget year 1, Accounts year 2 10
Lessons in Reforming Government Accounting Developing Country Governments Can Do Double Entry Bookkeeping FACT: D Entry is working in Ethiopia in the most remote administrative areas on earth with 12 th grade educated staff. VIRTUES of Double Entry Accounting Professionalism / empowerment / building the nation Building on their schooling Better control Timely, accurate, comprehensive reporting More transparent 11 First step in evolving an accounting system
Lessons in Reforming Government Accounting Preconditions Clear backlog of accounts manage one system Simplify administrative/budget structure (reduce BIs, single pool) Training, Training, Training, Training, Trainin. Did not skimp (inclusive) (78,000+) (DSA s single largest expense) Cascade model of TOT (at each level) Materials Standardized across all regions 4 local languages Continuous revision based on experience, copy for each participant Post Implementation Support Continuous field visits Creation of Wereda Support Units (WSUs) 12
Lessons in Developing Financial Information Systems Financial Information Systems are often Risky and Expensive in Developing Countries 79% Failure Rate 6% Sustainability 7 9 years to implement in Africa (5 7 other LDCs) $25 million for a medium size, 3 admin tier govt [Source: William Dorotinsky, Technology and Corruption: the Case of FMIS, The World Bank, 2003] 13
IT Works in Ethiopia and can Work Elsewhere COST V.1 & V.2 $3.6 million (when DSA ended January 08) V.3 $2.6 million Total $6.2 million compared to a pilot of $15 million DSA s FMIS Sequencing Strategy V.1 (yrs 1 8) (BIS/BDA). Replication (Rapid Rollout of Procedures) IT System brought to the user s system V.2 (yrs 9 11) (IBEX A). Reworked (new capability) Distributed (WAN/LAN/S A), low bandwidth MS SQL RDBMS V.3 (yr 12) (IBEX B). Rebuilt (new technical platform) (Why an upgrade has to run for 3 to 5 years) Oracle RDBMS, Business Rules Repository 14
Lessons on Financial Information Systems COTS is not necessarily superior High risk of driving PFM reforms with IT The Basics of PFM need only basic IT 15
Way Forward for Ethiopia s Financial Systems Possibilities Better Financial Management In Year Reporting (PBS) Management Accounting/Financial Statements Better Expenditure Allocation District performance agreements Transfer formulas need based, unit cost (equity) Potholes Not using the Treasury system Expansion of administrative units Government staff turnover Star Wars inappropriate PFM reforms (respect) 16
Thank you for listening 17